Q&A: EU transaction tax proposals

Jose Manuel Barroso, the European Commission president, said 'banks must make a contribution' [EPA]

A controversial bid by the European Union's executive to impose a tax on financial transactions is intended to make the finance sector pay something back after massive public sector bailouts in recent years.

"The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU," a commission statement said.

"For instance, for a purchase of shares to the value of 10,000 euros, the bank could charge 10 euros, which is not excessive."

The EU executive stressed that "house mortgages, bank loans, insurance contracts and other normal financial activities carried out by individuals or small businesses fall outside the scope of the proposal."

The EC proposals for the tax, which would take effect from January 2014, will need unanimous approval from all EU states.

What is the tax?

The measures will be a tax on the exchange of financial instruments between banks or other financial institutions, including securities, bonds, shares and derivatives.

The tax will not affect transactions typically undertaken by retail banks in their relations with private households or businesses, except when they relate to the sale or purchase of bonds or shares, house mortgages, or contributions to insurance contracts.

Why introduce the tax?

The EU executive, which is trying to find new ways to create its own income for the stated purpose of encouraging economic growth, rather than relying on contributions from grumbling governments, says financial services are currently "in the majority of cases exempt from paying value added tax". It says the financial sector enjoys "very high profit margins" and "implicit protection" from governments.